Invented by and named after renowned educator Dr Alan H. Andrews, the technical indicator known as Andrew's pitchfork can be used by traders to establish profitable opportunities and swing possibilities in the currency markets. On a longer-term basis, it can be forex to identify and gauge overall cycles that affect the underlying spot activity. Here we explain what this indicator is and how you can apply it to your trades using two different approaches: Defining the Pitchfork Available on numerous programs and charting packages, Andrew's pitchfork sometimes referred to as pitchfork line studies" is widely recognized by both novice and experienced traders.
As a result, the overall longer-term trend will in theory remain intact, regardless of the smaller fluctuations. If sentiment changes and supply and demand forces shift, prices will stray, creating a new trend. It is these situations that can create significant profit opportunities in the currency markets. A trader can increase the accuracy of these trades by using Andrew's pitchfork in combination with other technical indicators, which we'll discuss below.
Applying the Pitchfork In order to apply Andrew's pitchfork, the trader must first identify a high or low that has previously occurred on the chart. The first point, or pivotwill be drawn at this peak or trough and labeled as point A as shown in Figure 1. Once the pivot has been chosen, the trader must identify both a peak and a trough to the right of the first pivot. This will most likely be a correction in the opposite direction of the previous move higher or lower.
Turning to Figure 1, the minor correction off of the trough point A will serve nicely as we establish both points B and C. Once these points have been isolated, the application can be placed. The handle of the formation begins with the pivot point point A and serves as the median line. The two prongsformed by the following peak and trough pair points B and Cserve as the support and resistance of the trend.
When the pitchfork is applied, the trader can either trade within the channel or isolate breakouts to the upside or downside of the channel. Looking at Figure 2, you can see that the price action works well serving as support and resistance where traders can enter off of bottoms point E and sell from tops point D as the price will gravitate towards the median.
As always, the accuracy of the trade improves when confirmation is sought. A basic price oscillator will be just enough to add to the overall trade. Additionally, the trader can initiate positions on breaks of the support and resistance. Two great examples are presented at points F and G. Here, the market sentiment shifted, creating price action that strayed from the median line and broke through the channel trendlines.
As the price action attempts to fall back into the median area, the trader can capture the windfall that tends to happen. However, as with any trade, sound money management and confirmation must play important roles. Trading Within the Lines Let's take a look at how a trader might pitchfork from trading within the lines. Zooming in a little closer in Figure 4, we see a textbook evening star formation. Here, the once-rising buying momentum has started to disappear, forming the dojior cross-like, formation right below the upper prong.
When we apply a stochastic oscillatorwe see a cross below the signal linewhich confirms downside momentum. Taking these indications into consideration, the trader would do well to place the entry at point X Figure 4slightly below the close of the third candle.
Using sound money management and including an appropriate stop loss, the entry would be executed on the downward momentum as the price action once again gravitates towards the median line. Even better, here, the trader would be entered into a profitable position of close to pips over the life of the trade. Trading Outside the Lines Although trading outside the lines occurs considerably less frequently than within, they can lead to extended runs.
However, they can be slightly trickier to attempt. The assumption here is that the price action will gravitate back towards the median, like wayward price action within the lines. But it is possible that the market has decided to shift its direction; therefore, the break outside may very well be a new trend forming. To avoid a catastrophic loss, simple parameters are added and placed in order to capture the retracements into the channel and, at the same time, filter out adverse movements that ultimately result in traders closing their positions too early.
Looking at Figure 5, we see that the price action at point A offers such an opportunity. Once the break has been identified, we isolate and zoom in to obtain a better perspective.
In Figure 6, the trader is offered multiple opportunities to trade a break back into the overall trend as the underlying spot consolidates in ranging conditions. However, the real opportunity lies in the break that occurs later on in October. Using a moving average convergence divergence MACD price oscillator, the individual sees that a bullish convergence signal is forming, as there is a large peak and a subsequently smaller secondary peak in the histogram.
The entry is key here. How would you place the entry in this example? First, you need to make sure that the upper resistance is tested before you even consider a trade. If the resistance is not tested, it may mean that a downward trend is in the works, and by knowing this, you will have saved yourself from the trouble of entering into a non-profitable trade.
If the price action can break above this resistance, it will confirm a further rise in the price action, as fresh buying momentum will have entered the market. As a result, you should place your entry 30 pips above the target red linewith your subsequent stop applied upon entry.
Once your order is executed, the stop should be applied 5 pips below the previous session low. Given buying momentum, the assumption is that the low will not be tested because the price action will continue to rise and not spike downward.
Breaking It Down Step-by-Step Although the two methods discussed here trading within the lines and trading outside the lines may seem somewhat complex, they are quite easily applied when you break them down step-by-step.
Cross currenciesalthough they do exhibit trending patterns, tend to be choppier and yield less satisfying results. Now, let's break the process down. First we'll take the in-line approach, choosing example A in Figure 7: For breaks outside the trendlines, we take a look at the next example, point B in Figure 7.
Here, the price action has broken above the upper trendline but looks set to retrace back to the median or middle line. Conclusion Although it is primarily applied in the futures and equities forums and seldom used in the currency markets, Andrew's pitchfork can provide the currency trader with profitable opportunities in the longer or intermediate term, capitalizing on preferably longer market swings.
When the pitchfork is applied accurately and is used in combination with strict money management and textbook technical analysisthe trader is able to isolate great setups while weeding out the sometimes choppier price action in the forex markets that may increase his or her losses. If all of the criteria above are applied, the trade will be able to ride its way to profitability compared to its shorter-term peers. Dictionary Term Of The Day.
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The pivot point A has been drawn at a previously occurring trough, and points B and C have been established to the right of the pivot.
The line drawn from point A is the median line, while the two "prongs" serve as support and resistance. Notice the multiple opportunities offered to the trader inside and outside the boundaries. Figure 4 - A closer look at the opportunity reveals textbook technical formations that aid the entry.
Here, the trader can confirm the trade with the downward crossover in the stochastic and the evening star formation. Figure 5 - Notice how the price action gravitates once again towards the median.
This is a great opportunity, but money management and strategy remain important in capturing the run-up. Figure 6 - The convergence in the MACD, combined with the decline in the underlying spot price, suggests a near-term upward break.
Identify price action that has broken through the median line and that is approaching the upper resistance prong. Testing the upper resistance prong, recognize a textbook evening star or another bearish candlestick pattern. Looking at Figure 8, we see a textbook evening star formation at point X.
This will serve as the first signal. Confirm the decline through a price oscillator. In Figure 8, a downward cross occurs in the stochastic oscillator, confirming the following downtrend in the currency. Also notice how the cross occurs before the formation is complete, giving traders a heads up. Place the entry slightly below the close of the third and final candle of the formation.
As little as 5 pips below the low will usually suffice in these situations. Apply a stop to the position that is approximately 50 pips above the entry. If the price action rises after the evening star, traders will want to exit as soon as possible to minimize losses pitchfork still maintain a healthy risk measure.
In this example, the entry would ideally be placed at 0. Figure 8 - An evening star formation at point X suggests forex impending sell-off that is confirmed by the downward crossover in the stochastic oscillator. Identify the price action moving toward the median or middle line.
What traders want to confirm is that the price is indeed falling and will break back through the upper trendline. In Figure 9, the currency spot falls through the trendline, confirming selling pressure. Here, traders will want a confirmed break of a significant support level in order to isolate sufficient momentum and increase the probability of the trade.
Place the entry order 30 pips below the support level. In our example see Figure 9since the support level is at the 0. The following stop would be applied slightly above the 0. Receive confirmation through a price oscillator. The downward cross that forex when the stochastic oscillator is used gives traders ample confirmation of the break of support in the price.
Figure 9 - Taking a closer look, a great opportunity exists as the price action moves towards the median line. Profit-taking opportunities abound using this lesser-known pattern.
Capture quick profits forex the powerful directional biases of these two patterns. Capitalize on the yield of the interest rate differential by using flags and pennants. Understanding the concept of Support and Resistance in trading can drastically improve your short-term investing strategy. Stochastic and MACD oscillators can help isolate greater opportunities in range-bound markets.
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Emotion drives the market more than you might realize. Find out how psychology affects support and resistance zones. Read about how to draw and interpret price action from Andrew's Pitchfork, including when buy and sell signals are generated Understand the basics of pivot trading and how to use pivot points effectively to establish profitable trade strategy by Learn about some of the crucial tools that traders can use to confirm their price movements on a chart before entering or Learn what the ultimate oscillator pitchfork and find out about a common strategy traders use with the oscillator to signal entries Find out why traders and analysts use pivots in their analysis of price movements and why pivots can be used to create trading Learn a potentially highly profitable trading strategy that traders employ when an outside day occurs in trading near a major A legal agreement created by the courts between two parties who did not have a previous obligation to each other.
A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage A measure of the fair value of accounts that can change over time, such as assets and liabilities.
Mark to market aims A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number pitchfork time No thanks, I prefer not making money. Content Library Articles Terms Videos Guides Slideshows FAQs Calculators Chart Advisor Stock Analysis Stock Simulator FXtrader Exam Prep Quizzer Net Worth Calculator.